What Is a Spendthrift Trust and How Do You Set One Up?

Many families worry about what will happen to wealth after it passes to the next generation. There may be concerns about poor financial decision-making, personal debts, unstable relationships, or even exposure to lawsuits. 

In some cases, some traditional estate planning strategies may not offer enough protection if beneficiaries are financially vulnerable. In these situations, there are additional legal structures that can be used to help protect wealth from being misused, mismanaged, or lost to credits when it passes to future generations. 

This article will offer a detailed overview of one of the most effective tools for balancing long-term support with long-term protection: a spendthrift trust. Here, we’ll share how a spendthrift trust works, its benefits and limitations, how to implement it, and when other options might be a better fit. 

What is a spendthrift trust? 

A spendthrift trust is an irrevocable trust designed to protect a beneficiary’s inheritance from creditors, lawsuits, or other types of financial irresponsibility. These types of trusts contain a clause that legally prevents the beneficiary from assigning or pledging their interest in the trust, while simultaneously blocking creditors from seizing those assets before distribution. 

This clause is the core mechanism that protects the assets in a spendthrift trust, and is what distinguishes this type of trust from others. This type of clause is supported under the Uniform Trust Code (especially § 502–505) and has long-standing recognition in US law. It reflects a public policy interest—balancing a person’s right to give a gift with protection against the recipient’s mismanagement or outside claims. 

While most states uphold spendthrift provisions, there are exceptions and variations in some cases (especially in how third parties like ex-spouses or child support claims are treated). 

Key features of a spendthrift trust

The strength of a spendthrift trust lies in how it’s structured. To be effective, it must include specific legal provisions and clear administrative roles. When done properly, these features work together to limit beneficiary access to the trust’s contents, protect those assets from creditors, and give trustees the discretion they need to manage distributions responsibly. 

1. Spendthrift clause (creditor protection provision)

This clause is the defining element of a spendthrift trust, as it legally prevents the beneficiary from assigning, selling, or borrowing against their interest in the trust before distribution. 

This means that creditors cannot seize assets within the trust until they are officially distributed to the beneficiary. This clause is especially useful when a beneficiary is facing lawsuits, debt collectors, or exhibiting risky financial behavior. 

2. Trustee discretion and oversight

In trust planning, the trustee has the authority to decide when and how distributions are made from the trust to its beneficiaries. The trustee is expected to follow the instructions set in the trust document, but retain the power to make disbursement decisions based on the grantor’s original intent. 

It’s the trustee’s fiduciary duty to act in the best interest of the trust and its beneficiaries, and the trustee’s discretion is key to preventing impulsive or harmful decisions by the beneficiary. 

This means a trustee may delay distribution or structure payments based on specific beneficiary milestones. For example, a grantor might instruct the trustee to withhold full distributions until the beneficiary reaches age 30 but allow partial payments for specific milestones like completing a college degree or maintaining full time employment for a designated time period. Perhaps a trustee is empowered to release $25,000 to the beneficiary upon graduation and an additional $10,000 for each year the beneficiary remains employed. This structure may incentivize personal growth while still protecting the inheritance from impulsive decisions or external claims. 

3. Restricted beneficiary access

With a spendthrift trust, the beneficiary does not have direct access to trust assets or income unless the trustee approves a distribution. This restriction is intended to protect the beneficiary from their own potential financial misjudgment. 

Even if a beneficiary requests or demands a distribution, they cannot legally compel the trustee to release funds unless a distribution is explicitly required by the trust terms. This structure is particularly valuable if the beneficiary has a history of overspending, addiction, or poor financial literacy. 

How to set up a spendthrift trust

While these trusts offer strong protection and control, they must be carefully planned and properly structured to be most effective. This section will walk through the key steps involved in setting up a spendthrift trust, including how to assess if one is the right fit, how to choose a trustee, how to draft the necessary legal documents, how to fund the trust, and how to manage it over time. 

1. Determine if a spendthrift trust fits the client’s needs

The first step for any trust planning is to understand the client’s goals and objectives. Common situations where a spendthrift trust is appropriate include: 

• A client with a beneficiary who struggles with debt, addiction, or poor financial management skills
• A client who wants to protect wealth from future divorces, lawsuits, or business failures

Depending on the client’s flexibility needs, advisors should assess whether a revocable, discretionary, or other trust structure might be more appropriate for their situation before creating a spendthrift trust. 

2. Select the right trustee

As with all types of trusts, the trustee plays a central role in the trust’s success. It’s their job to enforce the spendthrift clause and manage assets over the years. 

The client will need to determine if they want to name an individual trustee (like a family member) or a professional fiduciary. There are pros and cons to each choice:

• Individual trustees may know the grantor and beneficiary better, but may lack neutrality or legal/financial expertise
• Corporate trustees/professional fiduciaries offer professional oversight and neutrality but likely charge higher fees

Whichever route is chosen, naming a successor trustee to ensure long-term administration is a crucial step. 

Help clients vet potential trustees with questions like: 

• What experience do they have with trust management? 
• What is their fee structure (if a corporate trustee)? 
• What is their approach to conflict resolution? 
• Are they comfortable entering into this type of relationship with the beneficiary (if an individual trustee)? 

3. Draft the trust document

While specific trust terms will vary from case to case, there are three core elements every spendthrift trust should include: 

• A clearly written spendthrift clause prohibiting the beneficiary from assigning interest and protecting assets from creditors
• Provisions that specify when and how the trustee may make distributions (for example, age thresholds, milestones, or health/education needs)
• Details on trustee powers and limitations, as well as administrative clauses for things like accounting, removal, or replacement

Often, the grantor chooses to work with an estate planning attorney to ensure the document complies with state laws and reflects their intentions clearly. 

4. Fund the trust and formalize legal requirements

As with all types of trusts, a spendthrift trust is only effective if it is properly funded. Common funding methods include: 

• Transferring real estate titles, investment accounts, or life insurance policies into the trust
• Listing the trust as the beneficiary for retirement accounts or insurance proceeds

Each transfer of assets may require specific legal documents, like new deeds or assignment forms, which may require assistance from an estate planning attorney. It’s also important to ensure the funding is in compliance with state-specific rules on asset transfers and trust recording. 

5. Manage the trust over time

Like estate planning in general, trust management is not a “set it and forget it” task. Ongoing reviews ensure the trust stays aligned with the grantor’s goals and any new familial, financial, or legal developments. 

Many grantors choose to participate in annual or biannual reviews with an attorney to: 

• Reassess the beneficiary’s needs and behavior
• Review trust performance and investment strategies
• Consider decanting or amending the trust (if allowed in the trust terms) to address life or law changes

Poorly managed trusts may become vulnerable to legal scrutiny or family disputes. To avoid complications and maintain the trust’s integrity, proactive oversight is essential. 

Spendthrift trust examples

In this section, find real-world scenarios that illustrate how a spendthrift trust works in practice.  Each example shows how a successful spendthrift trust might function in a different family, financial, or legal situation. 

Example 1: A young adult with poor spending habits

As its name implies, a spendthrift trust can be used to support a financially irresponsible beneficiary without giving them direct access to the funds. 

A father creates a spendthrift trust for his 24-year old son who had recently dropped out of college and was struggling with impulsive spending and resulting credit card debt. The father was concerned that an outright inheritance for the son would quickly disappear due to his demonstrated lack of financial discipline. 

To address these worries, the father created a spendthrift trust and transferred $750,000 into it to be controlled by a professional trustee. The trust allowed distributions only for specific needs such as rent, healthcare, and education. All other requests for distribution were subject to trustee approval. 

When the beneficiary wanted to use the trust funds to purchase a luxury vehicle, the trustee denied the request. Instead, the trustee offered to assist the son with a structured budgeting plan. Over time, the son began to develop healthier financial habits and still had the benefit of the trust to help him with his needs, since its assets had been protected from his previous behavior. 

Example 2: Protecting inherited wealth from divorce

A spendthrift trust can protect assets from division during divorce by keeping its assets separate from marital property. 

A mother left a multi-million dollar inheritance to her daughter, but out of concern for the daughter’s unstable marriage, the mother placed the inheritance in a spendthrift trust instead of transferring it directly. At the time, the daughter was in a troubled marriage and had previously shared joint accounts with her spouse. The trust was structured so that distributions were made at the sole discretion of the trustee and only for the daughter’s benefit. 

Two years later, the daughter filed for divorce. Because the trust assets had never been co-mingled with marital funds, and because the daughter could not access the funds directly, the assets were excluded from the marital estate. 

This preserved the inheritance and allowed the daughter to start fresh without being financially entangled with her former spouse. The trustee also helped to provide stability during the divorce proceedings by continuing distributions for the daughter’s basic living expenses. 

Example 3: Long-term support for a beneficiary with a disability

In some cases, a spendthrift trust can be used to support a beneficiary with a disability while preserving access to government benefits. 

A couple established a spendthrift trust for their adult son, who had a cognitive disability and relied on Medicaid and Supplemental Security Income. They wanted to ensure he would be supported financially without jeopardizing his eligibility for public benefits. The trust was carefully drafted with language that allowed the trustee to make discretionary distributions for services not covered by public assistance, including specialized therapy, transportation, and recreational activities. The beneficiary had no control over the trust, and the trustee coordinated closely with a special needs planner to ensure compliance with benefit eligibility rules. As a result, the son enjoyed an enhanced quality of life with consistent support, while the core trust principal remained protected and properly managed for the long term.

Advantages of a spendthrift trust

In some cases, a spendthrift trust is an ideal planning tool for supporting a beneficiary without allowing them direct access to their inheritance. Here are the top three benefits of using a spendthrift trust: 

• Creditor protection: A spendthrift trust legally protects trust assets from lawsuits or debt collection
• Prevention of reckless spending: Clients who have beneficiaries with addiction, gambling issues, or lack of financial literacy may find peace of mind from the control a spendthrift trust provides
• Estate planning efficiency: A spendthrift trust can be integrated into a broader estate planning strategy to provide tax benefits and intergenerational wealth preservation

Disadvantages of a spendthrift trust

This type of trust isn’t the best fit for every client. Three potential disadvantages to consider are: 

• Limited beneficiary control: For some beneficiaries, the lack of authority over their inheritance may result in friction or resentment between them and the grantor and/or trustee
• Cost and complexity: Some clients may not be prepared to handle the setup fees, trustee compensation, and legal upkeep required for a spendthrift trust. 
• Risk of legal challenges: Though rare, it’s possible for creditors to challenge and pierce the trust, which could be the result of poor drafting or trustee misuse. 

Alternatives to spendthrift trusts

While spendthrift trusts are powerful tools, they are not always the best solution for every client or beneficiary. There are several other trust structures worth considering depending on the client’s goals, the beneficiary’s financial behavior, and the level of protection or flexibility needed. In this section, we’ll cover three potential alternatives that might better suit certain clients. 

Discretionary trusts

A discretionary trust is structured to allow the trustee to control when and how much to distribute to beneficiaries, without fixed distribution requirements. While a discretionary trust can include a spendthrift clause, it doesn’t have to, so creditor protection varies. 

This type of trust can provide greater flexibility for beneficiaries with unpredictable needs, such as chronic illness, disability, or inconsistent income. 

Compared to a spendthrift trust, a discretionary trust:

• Offers greater distribution flexibility 
• May offer less formal creditor protection unless specific clauses are added

For example, a grandparent may set up a discretionary trust for a grandchild with a fluctuating medical condition, which allows the trustee to make payments as needed rather than on a predetermined schedule. 

Revocable living trust

A revocable living trust is a trust designed to avoid probate, retain control of assets, and maintain privacy. This type of trust can be changed or revoked by the grantor during their lifetime, adding a level of flexibility that a spendthrift trust doesn’t offer. 

Revocable trusts do not offer creditor protection while the grantor is alive, and typically don’t include restrictions on beneficiaries unless paired with other tools. 

Compared to a spendthrift trust, a revocable living trust: 

• Offer lifetime control and greater administrative convenience
• May provide fewer protections from financial risks 

For example, a parent may use a revocable living trust to pass assets to adult children who are financially stable and do not need protection from creditors or their own behavior. 

Domestic and offshore asset protection trust

Asset protection trusts are irrevocable trusts designed to shield assets from creditors or legal claims by transferring them out of the grantor’s name and into the control of a trustee. There are two types of asset protection trusts (APTs): domestic and offshore. 

Only a few states allow domestic APTs, and offshore trusts are typically located in creditor-friendly jurisdictions. These trusts are typically used to protect the grantor’s asset, rather than serving to protect beneficiaries. 

This type of trust has significant legal requirements, including irrevocability, independent trustee selection, and potential waiting periods before protections apply. 

Compared to a spendthrift trust, an APT: 

• Typically serves to shield the grantor’s wealth from future liabilities
• Isn’t focused on protecting beneficiaries from themselves or external threats

For example, a physician concerned about a malpractice lawsuit transfers a portion of his personal wealth into a Nevada asset protection trust to prevent future creditors from gaining access to it. 

Changing or revoking a spendthrift trust

Most spendthrift trusts are irrevocable, meaning they cannot be easily altered or revoked once established. In some cases, a trust may include built-in flexibility, such as: 

• A limited power of appointment retained by the grantor
• Provisions that allow the trustee to adjust certain terms under specific conditions

In some cases, it’s possible to decant a trust, which allows a trustee to transfer trust assets into a new trust with updated terms. 

Additionally, a court may approve changes to or termination of a trust if: 

• The original purpose of the trust has been fulfilled or is no longer achievable
• All beneficiaries and the trustee agree to the change

It’s important to consider that modifying a trust can carry legal and tax implications like: 

• Triggering gift, estate, or generation-skipping transfer taxes
• Impacting creditor protection or eligibility for government benefits
• Changing the trust’s income tax treatment

Though the process varies case by case, the general steps involved in changing a trust can include: 

• Reviewing the original trust document for relevant provisions
• Getting written agreement from the trustee and all beneficiaries
• Seeking court approval for the changes if required under state law
• Creating an amended trust document or establishing a new trust if decanting

Trust modifications should always be handled by an experienced estate attorney and financial advisor to ensure legal compliance and avoid any unintended consequences. 

Conclusion

Protecting a beneficiary’s inheritance requires more than good intentions. In some cases, it involves careful legal planning and the right trust structure for a family’s particular needs. 

When used properly, a spendthrift trust is an effective tool for safeguarding assets while still providing meaningful long-term support to a beneficiary. This type of trust is most commonly used in situations where a beneficiary faces financial instability, potential lawsuits, divorce, or a pattern of poor decision-making. 

However, spendthrift trusts are not the best solution for every family, as they can introduce complexity, require professional administration, and may create tension. 

As always, estate planning should be tailored and the right trust structure will depend on a client’s goals, values, wealth level, and family dynamics. 

For advisors creating and managing complex trusts and estate planning for clients, Vanilla offers modern tools to simplify the process. To see how Vanilla can support your estate planning practice, request a demo and explore the full range of trust tools available.

 

The information provided here does not constitute legal, financial, or tax advice. It is provided for general informational purposes only. This information may not be updated or reflect changes in law. Please consult with an estate attorney, financial advisor, or tax professional who can advise as to your particular situation.